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The $2 Billion Fire

At the end of 2000, Ericsson announced a $2.34 billion loss in its mobile phone division, a huge number that was the wholly unintended result of a tiny event–a small fire at a chipmaking plant owned by Ericsson supplier Philips NV. The damage to Philips, however, only totalled about $40 million in lost revenue.

At the end of 2000, Ericsson announced a $2.34 billion loss in its mobile phone division, a huge number that was the wholly unintended result of a tiny event–a small fire at a chipmaking plant owned by Ericsson supplier Philips NV. The damage to Philips, however, only totalled about $40 million in lost revenue.

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How a small problem at just one end of your supply chain can morph into a devastating loss if you’re not careful is the subject of a interesting new book called Resilient Enterprise: Overcoming Vulnerability for Competitive Advantage, by Yossi Sheffi, an MIT professor who directs the MIT Center for Transportation and Logistics. His premise is that a company’s success depends more on what its executives do before a crisis than how they act during that crisis.

I haven’t gotten too far yet, but the Philips story was fascinating. According to Sheffi, Nokia and Ericsson responded in entirely opposite ways to the Philips fire, with huge consequences. Nokia was proactive, pressuring Philips to immediately come up wtih alternative chip supplies as soon as they realized that there was going to be a significant disruption in production. They escalated the problem up the chain and got senior executives involved. Ericsson, however, was a bit too laid back, keeping the problem from senior executives and assuming that the disruption wouldn’t last long. This, says Sheffi, was a cultural difference, one that meant that the fortunes of the two companies were set to diverge long before the fire came along. Ericsson’s lack of focus on the items it thought it had no control over made it extremely vulnerable to any disruption.

Having just averted our own crisis, thanks in large part to actions our own leadership took both before and after it happened, the book resonated immediately here at Fast Company. Do you have similar stories to share?

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